In Gondouana, the share of capital in GDP is around 30%, the average annual growth of GDP
Question:
In Gondouana, the share of capital in GDP is around 30%, the average annual growth of GDP of 3%, the depreciation rate of 4% and the capital production ratio of 2.5. If the production function is of the Cobb-Douglas form and if Gondouana is in a stationary state:
1. What should the savings rate be in the initial steady state? (an indication: use the relation of the stationary state: sy = ( + n + g)k)
2. What is the steady-state marginal productivity of capital?
3. Let us assume a policy leading to an increase in the savings rate allowing the Gondouan economy to reach the volume of capital dictated by the golden rule. What happens to marginal productivity capital? Compare this productivity to that which prevailed in the steady state. Explain
4. What is the capital-production ratio corresponding to the steady state dictated by the golden rule? 5. What is the savings rate allowing the steady state dictated by the golden rule to be reached?
International Economics
ISBN: 978-1429278447
3rd edition
Authors: Robert C. Feenstra, Alan M. Taylor